It added that global government debt rose to nearly 94 percent of gross domestic product last year and is now on course to top 100 percent by 2029, due largely to yawning deficits in the U.S., China and Japan.
The U.S., it noted, “is running a general government deficit of 7 to 8 percent of GDP despite operating near full capacity, with no debt consolidation plan in sight,” while current fiscal policy, dictated by President Donald Trump’s “One Big Beautiful Bill” last year, has put debt on course to hit 142 percent of GDP by 2031.
The IMF’s Fiscal Affairs Director Rodrigo Valdés told a press briefing that Washington needs a “credible” consolidation plan to narrow the deficit by 4 percentage points.
The deeper governments get into debt, the more their interest costs rise, leading them to divert scarce tax revenues away from spending on things like health, education and pensions. That problem has become more acute since central banks such as the Federal Reserve and European Central Bank stopped the massive bond purchases that they used to support the economy, first after the 2008 crash and then during the Covid pandemic. That shift, caused by the return of inflation, means that today’s buyers of government debt insist on being paid adequately to cover their risk.
The Fund also noted with concern that various European governments had activated “get-out” clauses limiting their borrowing in order to finance a sharp increase in defense spending, and warned that this would make for increasingly difficult trade-offs with traditional spending priorities.
Valdés warned that the risk of government debt crises should not be ignored just because financial markets are still “behaving.” Both the U.S. and Europe are becoming more dependent on flighty investors such as hedge funds to absorb the massive amounts of debt they are pumping into the markets, he said — in marked contrast to Asian countries, which can now count on domestic long-term investors to hold more of their debt.